The fact that the U.S. government can borrow money for cheaper-than-free, even after the ratings downgrade, comes about from a combination of two factors (and no, I have no idea what the relative strength of each factor is in the mix):

There is not enough U.S. debt to satisfy the market's appetite for U.S. debt. Since there's not enough supply to meet demand, the price of U.S. debt (which is inverse to the interest rate) increases.

The market thinks that the long-term growth prospects of both the U.S. and world economies are dismal. A negative real 10-year interest rate says that investors are expecting a "lost decade."

The bad thing about cutting the federal deficit is that unemployment is very high and interest rates are very low. Given that, taxing productive activity to pay down debt is really obviously the wrong thing to do, and borrowing money to employ currently unemployed resources is really obviously the right thing to do.

Obviously, I would advocate putting money towards productive uses (rebuilding infrastructure, research and development, etc.) and towards programs that have large economic multiplier effects (food stamps, unemployment benefits, WIC, etc.), since those activities would stimulate demand and the economy now, while also laying the foundations for increased growth in the future. But, from an economic point of view, the government should just be borrowing and doing ANYTHING with the money, since it's cheaper-than-free - right now, borrowing money to give huge (temporary) tax refunds to everyone or even just hiring unemployed people to dig holes and fill them back up again would be a net economic gain.

The bottom line is, the U.S. should be borrowing and spending way more money in the short-term in order to boost growth and decrease unemployment, but both Congress and the White House are focusing on the totally wrong issues (i.e. cutting spending). And the most frustrating thing is that at least the White House knows better - Robert Reich, talking to people in the administration, says that there has been a deliberate decision to focus on the wrong issues, knowing that they’re the wrong issues:

So rather than fight for a bold jobs plan, the White House has apparently decided it’s politically wiser to continue fighting about the deficit. The idea is to keep the public focused on the deficit drama – to convince them their current economic woes have something to do with it, decry Washington’s paralysis over fixing it, and then claim victory over whatever outcome emerges from the process recently negotiated to fix it. They hope all this will distract the public’s attention from the President’s failure to do anything about continuing high unemployment and economic anemia.

Sigh ... it's now several months later, and nothing has changed. One begins to wonder if the people in Congress have the intelligence to learn from their past mistakes, and/or to observe the world around them.

[Personal note: I'm traveling again as of Thursday. I may try to throw up another post before then, but if I don't manage it, there will be no more posting until after Memorial Day. In the meantime, enjoy the archives, and take care of yourselves!]

About This Blog

I am one of the largely nameless, faceless bureaucrats who work tirelessly (and largely thanklessly) to help ensure that poor people don't go hungry - and a billion other tasks government bureaucrats do that no one notices until something stops working. Living and working in DC is making me angry - and I vent my anger as thoughtfully as I can. Well, OK, maybe I'm not terribly angry ... but I thought it was a good name for a blog. If you're also a bureaucrat, or angry, or thoughtful, I'm happy to entertain guest posts.